RBI keeps rates unchanged, but raises its inflation forecast

The central bank has raised its inflation forecast for the fourth quarter of the fiscal to 5.1 per cent

New Delhi: The Monetary Policy Committee (MPC) of the Reserve Bank of India Wednesday kept the short-term lending rate, also known as repo rate unchanged at 6 per cent in its sixth bi-monthly policy review of the fiscal year.

While the repo rate is at a seven-year low, the reverse repo rate also remained unchanged at 5.75 per cent. The central bank last cut the key lending rate by 25 basis points in August 2017.

The central bank has raised its inflation forecast for the fourth quarter of the fiscal to 5.1 per cent from 4.3-4.7 per cent in the second half of the fiscal.

The RBI revised GVA (gross value addition) growth to fall to 6.6 per cent during the second half of fiscal 2017-18 from its earlier forecast of 6.7 per cent.

Polls conducted in the run-up to the MPC meeting had suggested the RBI would hold rates constant, but respondents had said they expected the tone to change from neutral to hawkish due to inflationary pressures and the fiscal slippage of the government.

Reuters polled 60 economists, of which 58 expected the repo rate to be kept at 6 per cent, the lowest since November 2010. The other two were in favor of a rate hike by 25 basis points. In a Bloomberg poll of 46 economists, 41 were in favor of a status quo as far as repo and reverse repo rates were concerned. However, 5 economists expected a 25 basis point cut to 5.75 per cent.

In its fifth bi-monthly Monetary Policy Statement in December, the RBI had maintained a neutral stance, in a bid to keep the Consumer Price Index inflation down to its medium-term target of 4 per cent.

The repo rate – the rate at which the RBI lends to commercial banks – was kept at 5.75 per cent and the reverse repo rate – rate at which the commercial banks lend to the RBI – was fixed at 6 per cent.

In its December policy, RBI had cautioned about the rising inflation trend by revising the inflation forecast for Q3 and Q4 to 4.3 – 4.7 per cent from 4.2-4.6 per cent. Since then, headline inflation or CPI inflation has gone up to 5.21 per cent as of December 2017, breaching the RBI’s medium term target.

The rise in MSP by 50 per cent promised by the government in the Union Budget 2018-19, rising oil prices and the lasting effect of the rise in house rental allowance as recommended by the Seventh Pay Commission may push up the inflation level in the economy, analysts say.

The yield on the 10-year benchmark paper has risen to 7.56 percent from 6.4 percent during this period, owing to the government breaching its fiscal deficit target of 3.2 per cent in 2017-18. The government has set a 3.3 per cent fiscal deficit target for 2018-19, which is higher than the previous target.